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Theranos Threatens Bankruptcy; Judge Stops Proposed Deal

Theranos played the bankruptcy card in a class-action against the company, but it was a bad play that derailed a proposed deal.

In documents unsealed in Delaware Chancery Court, investors said the company threatened to file for bankruptcy protection if they didn't accept a deal to dismiss their claims. A Theranos lawyer tried to pressure Partner Investments LP and two other funds, which invested more than $96 million in the company, to accept more equity instead.

According to reports, the plaintiffs said Theranos' attorney "sent the unmistakable message" that the company would declare bankruptcy if the investors turned down the deal. The plaintiffs then discovered that Theranos engineered the deal to make it impossible for the funds to obtain "any recovery."

Judge Travis Laster has stopped the proposed deal for now and set a hearing on the matter for June 26.

Bad Timing

The disclosure comes at a bad time for Theranos, which agreed this week to pay $4.65 million to settle with consumers in Arizona and to stop selling its products there. The company is also facing increased scrutiny by federal regulators while fighting class actions in California, too.

In San Jose, U.S. Magistrate Judge Nathanel Cousins denied the company's motion to dismiss one class action by investor funds. Theranos' lawyers had argued the plaintiffs could not pursue their case because the funds didn't actually buy the shares.

But the judge allowed the plaintiffs to proceed under laws designed to prevent fraudulent manipulation of the market. "It focuses on the actions of the seller of the securities, not the relationship between seller and buyer," the judge said.

The First State

In the Delaware case, Theranos said the Partner investors had mischaracterized the "exchange offer." The company said the deal would give them "an enhanced preference in the event of liquidation."

Partner's representatives sued Theranos last year, accusing the company of duping them about its performance and technology. The company claimed it had developed a revolutionary blood test that could produce dozens of blood tests from a single drop of blood.

But those claims turned out to be false, as the Wall Street Journal disclosed the company had invalidated thousands of tests. The start-up, built largely on investors' money, plummeted from a a valuation of $9 billion to about $700 million virtually overnight.

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